World Bank Sees China Soft Landing, Asia Stimulus Room: Economy

A pedestrian walks past the People's Bank of China in Bejing, China. The central bank said that it can’t relax vigilance over inflation, as “the foundation of price stability is not yet solid.” Photographer: Nelson Ching/Bloomberg

Nov. 22 (Bloomberg) -- The World Bank said China is heading
for a soft landing of growth in excess of 8 percent next year,
and with most Asian nations has fiscal scope to cushion its
economy from an escalation in Europe’s debt crisis.

Developing East Asia, which excludes Japan, Hong Kong,
Taiwan, South Korea, Singapore and India, will see its expansion
moderate to 7.8 percent in 2012 from 8.2 percent this year, the
Washington-based development lender said in a semiannual report
today. While China faces the risk of a “strong” impact from a
real-estate correction, its gross domestic product will rise 8.4
percent next year and about that pace thereafter, the bank said.

The report signals that Asia, which led the world out of
the 2008-2009 recession, is poised to withstand the blows from
any slump in demand for its exports or pull-back in credit by
European banks. The World Bank said countries with high
investment rates, such as China, should focus on boosting
consumer spending in any fiscal stimulus, such as with social
security and pension provision.

“Clearly the region is being affected by Europe and the
global environment has weakened,” Bert Hofman, the World Bank’s
chief economist for the East Asia and Pacific region, said in an
interview with Bloomberg Television. At the same time, “imports
into China are holding up quite nicely and it is becoming
increasingly a market for consumption goods of manufacturing
countries in the region.”

Retreat in Stocks

Asian stocks have retreated amid concern that the region’s
export-reliant economies will suffer the impact of diminished
global demand as the euro region struggles to stem its debt
crisis. The MSCI Asia Pacific Index traded 0.2 percent higher as
of 5:40 p.m. in Tokyo, paring this year’s decline to 18.2
percent.

In other economic releases today, Taiwan’s unemployment
rate increased for the first time in five months in October.
Hong Kong’s inflation unexpectedly held at 5.8 percent,
exceeding the 5.7 percent median estimate of eight economists
surveyed by Bloomberg News.

The U.S. Commerce Department may say today the economy
expanded at a 2.5 percent annualized rate in the third quarter,
the same as the government’s prior estimate, according to the
Bloomberg survey median of 81 estimates. Mexico’s economic
growth probably accelerated last quarter, with GDP climbing 3.9
percent from a year earlier, a separate report may show.

Canada Consumers

The World Bank’s growth projection for developing East Asia
in 2011 was unchanged from a March estimate. For next year, the
lender said in March that growth would be around 8 percent.

Asian policy makers have shifted their focus to shielding
growth, rather than stemming inflation, as Europe’s debt woes
and a struggling U.S. economy increase the risk of another
global recession. Australia and Indonesia have cut interest
rates this month, while the Philippines in October unveiled a
fiscal stimulus package to spur the economy.

In China, “the risk in the short term of any hard landing
is very limited -- we believe that a soft landing will take
place,” Hofman said. The World Bank predicted China’s GDP
growth will ease next year from a 9.1 percent pace in 2011.

A real-estate bust would have a “strong impact on domestic
demand and consumer sentiment” in China, according to the
report. Even so, the government has “ample fiscal space and
room for monetary policy normalization should such a need arise,
more so now that inflation seems to be on the wane again,” the
bank said.

Sliding Currencies

The World Bank forecast China’s inflation rate to slow to
4.1 percent next year -- still “elevated” -- from 5.3 percent
in 2011.

“Investors still do not fully discount the possibility of
a disorderly sovereign debt restructuring in the advanced
economies,” the World Bank said in its report. “Should such an
event occur, it may well trigger another recession in Europe.
Spillovers to developing East Asia will be substantial, through
trade, financial flows, remittances, and consumer and investor
sentiment.”

Emerging Asian nations felt the impact of Europe’s woes in
September, when their currencies slid against the dollar,
prompting them to use some of their foreign-currency holdings to
limit the impact. The World Bank said that reserves “should be
sufficient to withstand further shocks.”

India’s rupee fell to a record of 52.73 per dollar today,
prompting Subir Gokarn, deputy governor at the central bank, to
say he’s weighing the possibility of action to stem the
declines.

‘Ready to Act’

East Asian countries had a median value of foreign-exchange
reserves equivalent to 50.4 percent of gross domestic product as
of mid-2011, or enough to cover 8.9 months worth of imports,
according to the World Bank.

Policy makers in the region are “likely to hold off
further policy tightening and stand ready to act should further
negative shocks to growth occur or in the extreme case of a
disorderly resolution of the euro zone debt problem,” it said.

In China, monetary conditions “remain accommodative” and
there’s space for further fiscal stimulus if necessary, the
World Bank said. The central bank said Nov. 16 that it can’t
relax vigilance over inflation, as “the foundation of price
stability is not yet solid,” while reiterating Premier Wen
Jiabao’s pledge to “fine-tune” policies when needed.

‘Lingering Vulnerabilities’

“Policy makers will need to walk a fine line guarding
against the short-term risks to growth and the lingering
vulnerabilities associated with a still-buoyant, if not
overheated, economy,” the World Bank said. “To mitigate the
vulnerabilities of continued low real interest rates, an easing
of fiscal policy appears the most appropriate line of defense
before the monetary policy stance is eased.”

While new capital rules being introduced in Europe will
constrain the ability of the region’s banks to lend in Asia,
high reserves and current account surpluses in most East Asian
countries will protect them from the impact of possible renewed
financial stress, the World Bank said.

“Bank credit flows remained stable through the first half
of 2011 but represent an important risk, should European banks
start deleveraging,” the Washington-based lender said. “Even
if a definitive euro zone settlement is implemented
successfully, European banks would likely need to deleverage and
could reduce exposure to emerging markets.”

International banks reduced loans available to East Asian
companies by about $36 billion between the middle of 2008 and
the first quarter of 2009, the World Bank said.

“An impact of similar proportions now could mean that over
$30 billion dollars flow out, constraining credit available to
the private sector,” according to the report. European banks
have about $427 billion of loans outstanding to developing East
Asia, it said.